A Small but Meaningful System Design Tip By, D. R. Barton, Jr.
“If you don’t have time to do the job right, how will you find time to do it again?”
—My Dad, teaching me how to properly mow a lawn
I had just finished tightening a Phillips head screw that had wiggled out a bit on my desk. I was feeling quite handy (though my lovely and talented wife would surely chuckle at the thought…). When I was done, I noticed a small finishing nail sticking out at just the spot where it could scratch my leg or rip or pair of pants that got too close.
Without thinking much and wanting to be efficient by not going back to the garage for a hammer, I just turned my screwdriver around and popped the nail with the handle. Mistake. The nail broke off a piece of the plastic screwdriver handle. And since the handle wasn’t that heavy, the nail only moved about half of the required distance.
If you don’t have time to do the job right, how will find time to do it again? I could hear my dad’s words ringing in my ears. Not only did I have to go the garage and get the hammer anyway, I also had to go the hardware store and get a new screwdriver. (A good quality one this time. No nail is going to get the best of me…) I’m sure Dad will get out a kick out of hearing this story later tonight
Setting Stops Shouldn’t Be About Speed…
My desire for efficiency cost me a cheap screwdriver. But, as traders and investors, setting a bad “get out point” or stop loss could cost us lots more. In fact, acting on the thought of, “I’ll exit my position in Apple if it trades down to $160”, by placing a stop loss at $160 can be costly.
Here’s why. The part of our thought process that values efficiency and speed over other characteristics likes getting things done quickly and easily. Set the stop loss at a whole number and move on. No pesky decimals to mess with, and I get the job done with fewer keystrokes.
The trouble is this. The data is pretty clear that prices stop at whole numbers (anything without a decimal or, for you math-heads, any nonnegative integer) much more often than they randomly should. I actually researched this back in 2004. For a set of four different stocks (IBM, General Electric-GE, Microsoft-MSFT, And Qualcomm-QCOM), I found that the percent of time that a weekly high or low stopped on a whole number over 250 weeks was pretty amazing—it was 1.7 times more often than random for GE, 2.1 times higher for QCOM and MSFT, and 2.7 times higher for IBM.
Today, I did a spot check to see if it’s still the case that price reacts more often at whole numbers. I took a look at MSFT data dating back to 1998 and found that daily highs and lows for 6,364 days still stopped at whole numbers 2.7 times more often than random.
For system design, this means that whole numbers really act like mild, but meaningful, support and resistance levels. Doing something simple like making sure you don’t accidentally set a stop at a whole number or set a profit target just on the other side of a whole number could make a difference across a large number of investments or trades.
What tricks and tips do you have for adding small edges in your system design? Let me know! Relay them to me and any other thoughts or comments you have!
Send them to me using drbarton “at” vantharpinstitute.com
Great Trading and God bless you,
D.R. Barton, Jr.
